To put it bluntly, India had run out of money.
The month of July has a special significance in the history of India after independence. The economy of the country was weak and fragile in the eighties, going further downhill. Despite several fiscal reforms, the economic growth couldn’t pick up and continued to grow annually at a meager 3.5%.
The Balance of Payment (BOP) crisis, rising fiscal deficit and increasing overvaluation during the decade had led to a chaotic situation. As the country was all along struggling to stabilize its shaking economy, the invasion of Kuwait by Iraq destabilized the efforts. The oil prices went out of control. Even the foreign remittances witnessed a drastic fall, leaving an adverse impact on the already struggling economy.
The Balance of Payments (BOP) is a statement of all transactions between entities in one country and the rest of the world over a defined period, such as a quarter or a year. In other words, all transactions that a country’s individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country.
All the economic mess, where the country was faced with widening fiscal deficit and growing current account deficit to dangerous proportions, ultimately culminated into a full-fledged economic crisis in June 1991. To put it bluntly, India had run out of money. Gross official reserves stood at US$ 5.8 billion (1.3 months of imports) by the end of March 1991. Inflation rose to 12.0 per cent.
This chaotic economic situation destabilized the political set-up and the country saw three prime ministers within a span of just one and a half years. V.P. Singh was prime minister of the country for just one year (December 1989 – November 1990). Chandra Shekhar took over from Singh, but lasted just for six months (from November 1990 – June 1991). P. V. Narasimha Rao became the third prime minister in just one and a half years’ time. His term from June 1991 to May 1996 proved a significant period for the country, especially on the economic front. India witnessed massive structural economic reforms which changed the economic fortunes of the country.
Narasimha Rao, against his reputation of being naïve in economic affairs, surprisingly supported the then finance minister, Manmohan Singh, to design and roll out radical economic reforms, which included structural changes and stabilization measures. To be precise, it was on July 24 1991 that Singh presented a landmark budget against all odds. It was a budget which changed the lives of every citizen and brought the country to a position of economic power which it is enjoying today.
Precisely, a new Economic Policy, 1991 was framed which tailored Liberalization, Privatization and Globalization (LPG) initiatives. The LPG became a buzz word during that time. Credit also goes to the International Monetary Fund (IMF) and other international organisations which provided the required financial support on the back of opening of India’s economic borders.
Here a quote of Manmohan Singh’s budget speech is worth mentioning: “I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, no power on earth can stop an idea whose time has come. I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”
So, through the means of liberalization, India opened its economic borders. This encouraged foreign investors to invest in domestic companies. At the end we witnessed a free market system which encouraged the local companies to grow along with their foreign counterparts and resulted in unlocking the country’s economic potential.
Precisely, with the entry of foreign investors and multinational brands in the country, there was free flow of capital in the economy. The foreign investors were able to invest in varied sectors and this resulted in the appreciation of the stock market with a significant presence of foreign players.
The act of privatization, also known as disinvestment, saw the government transfer the ownership and management control of the public sector companies to private players.
Through privatization, the government primarily reduced its control over a number of industries by selling off its stake and raised funds to meet other economic objectives which were otherwise unachieved for want of funds. Needless to mention, privatization helped to create an environment of healthy competition among companies and resulted in their increased efficiency. It also helped the government to get itself relieved of the responsibility and focus on other important areas. There were innumerable companies and industrial units which had turned sick and were a burden on the government exchequer due to government’s lack of attention. But the privatization initiative revived such sick companies.
Finally, the globalization of the economy opened the door for the rest of the world to participate in the country’s economy. This is the move which helped India to become an important player in the world economic order.
In other words, Globalization paved the way for the country to pitch its goods and services without border restrictions. Manufacturing and retailing of multinational companies in the country was made possible only through the means of Globalization and at the same time local firms also got the opportunity to cross borders with their products and services. Precisely, the growth of domestic companies at the international level is the outcome of globalization.
Economic experts have rightly picked outsourcing as one of the landmark achievements of globalization. It not only reduced the cost of labour, but also helped to garner new skill sets in specific areas, such as marketing, legal advice, technical support, IT, etc. Notably, India is today known as a place for hiring cheap but effective workforce and this has attracted internationally operating countries to hire such human resources.
To sum up the situation, we find the Economic Policy of 1991 with a framework of LPG initiatives as the main force in bringing the country to a position of economic power where it stands today. Increasing foreign direct investment and forex reserves, growing of various industrial sectors, especially the IT industrial sector etc. is all outcome of the LPG.
Let’s salute the great minds of that time in government, especially the man behind the concept of Economic Reforms, 1991, Dr. Manmohan Singh and the then Prime Minister, Narasimha Rao, for supporting all-out the concept of reforms and bringing the country to a position of economic power.
Lastly, the measures undertaken by successive governments at the back of the economic reforms of 1991 also merit appreciation. They too have fuelled the country to emerge as one of the fastest growing economies in the world.
Sajjad Bazaz heads internal communication & Knowledge Management Department of Jammu & Kashmir Bank Limited.